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Investing In A Real Estate Syndication: All The Details

Investing In A Real Estate Syndication: All The Details

Before you’re fully committed to, and after you’ve become interested in a real estate syndication, you need to know several details about actually investing in these deals.

The process of investing in a real estate syndication is very different from picking a stock or a mutual fund online. Furthermore, unlike typical investment properties, there are hold times, barriers to entry, and a whole set of expectations that you need to know about prior to committing to a deal.

As a smart investor, you’ve got to know exactly why you’re choosing a particular investment in addition to the required credentials, the process, what’s involved, and how long you should expect to wait until payout.

Guess what? You’re in luck! That’s precisely what you’re about to read!

How long does a real estate syndication last?

Unlike an online stock, ETF, or mutual fund that can be exchanged daily or more, real estate syndications come with required, projected hold times. While each real estate syndication is different, we typically see hold times of 5-7 years, sometimes longer.

Real estate syndication deals have to allow time for property renovations, management changes, occupancy rate increases, and even market conditions to adjust. This means that you should plan to invest your capital for 5-7 years (or the timeline stated on the investment summary & memorandum), because you will not be able to take your money out until the asset is sold.

Who can invest in real estate syndications?

Now you might be wondering if there’s any red tape. 

Is just anyone allowed to invest in this sort of thing? It seems pretty exclusive.  

Well, you’re kind of correct. A large majority of real estate syndications are open to accredited investors only, though some are also open to non-accredited, sophisticated investors (i.e., investors who can demonstrate that they understand real estate syndications and their risks).

In order to be considered an accredited investor, you must meet at least one of two requirements. 

  1. You must have at least $1 million in net worth, not counting your primary home.

  2. You must make $200,000 per year as an individual, or $300,000 jointly with your spouse, have made this amount or more for each of the last two years, and intend to make this amount or more this year.

If you meet either one or both of these requirements, then you are an accredited investor.

If you’re not yet an accredited investor, there are still some real estate syndication opportunities out there for you. However, you may need to look a little harder for them. This is because the opportunities for non-accredited investors cannot be publicly advertised, hence the feeling of secrecy you’re getting.

What’s the process for investing in a real estate syndication?

So maybe you’re accredited, or maybe you’re not, but you’re really wondering HOW someone invests in these elusive real estate syndication deals you’re reading so much about. 

Here are the basic steps for investing in a real estate syndication:

  1. The sponsor announces that the deal is open for funding, usually via email.

  2. You review the investment summary deck and decide to invest.

  3. You submit your soft reserve, telling the sponsor how much you’d like to invest.*

  4. The sponsor holds an investor webinar, where you can get more information and ask questions.

  5. The sponsor confirms your spot in the deal and sends you the PPM (private placement memorandum).

  6. After signing the PPM, you wire in your funds or send in a check.

  7. The sponsor confirms that your funds have been received.

  8. The sponsor notifies you once the deal closes and lets you know what to expect next.

*Real estate syndications are almost always filled on a first-come, first-served basis. Thus, sponsors use a soft reserve to help them determine who’s interested in investing.

By submitting a soft reserve, you are telling the sponsor you’re interested in the deal and want to invest X amount. The soft reserve does not guarantee you a spot in the deal, nor does it lock you in. You can always back out or change your mind later.

Pro tip: If you’re thinking about investing in a deal but aren’t sure whether you want to invest $50,000 or $100,000, go ahead and put in a soft reserve for $100,000. This holds your spot in the deal.

If you decide later that you only want to invest $50,000, you can easily decrease your investment amount. However, if you had put in a soft reserve for $50,000 and later wanted to increase it to $100,000, you might not be able to increase your soft reserve amount if the syndication is already over-subscribed.

What happens after I invest in a real estate syndication?

So, you’re sure you want to invest in a real estate syndication, you do your research, and you lock in a deal. Now what? 

After you’ve sent in your funds for a real estate syndication deal, your active participation is done. Now you can sit back and wait for the cash flow to start rolling in.

Depending on the particular deal, you may receive either monthly or quarterly cash flow distributions, and they may start immediately, or not for a few months.

Regardless, you should start receiving monthly updates as soon as the deal closes. These monthly updates will include information on the latest occupancy and progress on the renovations.

Every quarter, you will receive a detailed financial report on the property, and every spring during tax season, you will receive a Schedule K-1 for your taxes, which will report your share of the income and losses for the property.

As your projected hold date approaches, the monthly information you receive may include information about a sale. Once the asset sells, you can expect your original investment capital to be returned, plus any percentage of profit due to you. 

Now You’re In The Know…

At this point, you’ve gone from curious, to interested, to knowledgable about passively investing in real estate syndication deals. All that’s left to do from here is to actually find a deal and get involved! You’re fully informed about who can invest, the hold time, the process, and what to expect. Plus, we’re here for any questions or guidance along the way. 

 

Happy investing! 

5 Things Every New Investor Should Do Before Investing In Their First Real Estate Syndication

5 Must-Do Actions

– For The New Investor –

When you first begin considering real estate syndication as an investment option, it can feel intimidating, overwhelming, or like that first day on the new job.

I personally experienced fears around investing in a real estate investment property I’d never seen; had concerns about how I’d get my money back; and fought with doubts around the inability to log into an account and even see my “money”.

I addressed my fears head-on through research and education. Every article I read, podcast episode I listened to and each conversation I had, built up my confidence until I felt ready for action.

If you’re considering your first real estate syndication and feeling hesitant, I recommend taking time and action to do research, connect with other real estate investors, read through previous deals, and build up your knowledge base.  With education comes confidence! 

In addition to our amazing content, here are a few of our favorite resources to help you on your journey…

Do Your Homework

 

The best way to build your real estate investing confidence is through self-education and research. Listen to podcasts, read books, and find websites on real estate.

Books:

Rich Dad, Poor Dad, by Robert Kiyosaki – without a doubt this classic was fundamental in our mindset shift to making our money work for us with cash-flowing assets. A must-read!!

Tax-Free Wealth, by Tom Wheelwright – Tom is Robert Kiyosaki’s CPA and has an incredible wealth of knowledge about how to maximize your investments with the ultimate goal of reducing or eliminating your tax liability.

ABC’s of Real Estate Investing, by Ken McElroy – more of a behind the scenes look at finding, acquiring and running syndications, Ken delivers a great overview of the multifamily syndication process from the active partner’s perspective.

YouTube Channels We Love:

  • Ken McElroy
  • Bigger Pockets
  • Graham Stephan

Podcasts:

  • BiggerPockets Podcast – seemingly endless episodes across a wide variety of topics
  • Best Real Estate Investing Advice Ever with Joe Fairless – an insane amount of content from one of the biggest in the business
  • The Real Estate Radio Guys – these guys have been focused on real estate investing for about 15 years and have some great content

Ask Questions

You can find amazing, relevant Facebook groups and also forums like BiggerPockets can help answer questions…and even help you learn what questions you should be asking!

It’s likely that other real estate investors have asked about your same concerns and, just by reading through the forum’s questions and answers, you’ll gain clarity.

Remember there are no dumb questions and that you have the right to be diligent about gathering answers to your concerns.

Connect with Other Real Estate Investors

It’s a common refrain to hear that real estate investing is a team sport. And every successful real estate investor needs a supportive community.  Considering that a syndication is literally a group real estate investment, you’ll want to network with other like-minded investors.

New investors will share similar anxieties, questions, confusion, and excitement. Experienced real estate investors can provide invaluable firsthand accounts of their experience with various projects, including apartment complex investments, and sponsors.

Find other investors through online forums like BiggerPockets, local networking events, meetups, or by asking sponsors of other syndications if they’ll connect you to their current real estate investors.

Review Previous Real Estate Deals

Finding comfort with financial projections, summary data, and real estate investment lingo may feel overwhelming.

A great way to help understand the language and how investments play out is to review other investment summaries.  You’ll start to understand the flow of the deal packages, how each sponsor communicates, and exactly which real estate investments interest you.

Take Your Time…But Be Ready!

Simply due to the nature of the process, multifamily syndications usually have a limited time between becoming an official, approved deal and closing the deal.  As a result, each new real estate investment opportunity will fill up quickly. This can make new real estate investors anxious from the small window to decide and at the same time panic from fear they are missing the best deals. 

Stay calm.  Remember, there will always be another high-return investment opportunity.

Allow yourself time to complete the steps laid out here, so that when you make your real estate syndication choice, you are confident about the investment information provided.

Considering Everything…

If you take nothing else from this article, remember it’s completely normal to feel skeptical, anxious, and even timid when making your first real estate syndication commitment.

The ability to take action is what separates the successful from those who give up.

Your first real estate syndication deal is a huge milestone in your investing journey, and even though your head might be spinning now, this is a time to savor taking steps to control your future.

It is absolutely life-changing when you start generating Passive Income…for life!

In addition to the ideas just presented, you can amplify your journey with the following resources: 

  • EXPLORE more about the power of passive real estate investments in our section of other blogs and videos.
  • SIGN UP for our newsletter for passive income-related content delivered right to your inbox
  • JOIN our Passive Income Investors Group to gain access to multifamily investment opportunities and more behind the scenes content

Quit! Trading Your Time for Money

Stop Trading Your Time for Money

– And Start Creating Passive Income –

Take a brief moment with me and imagine this…

You wake up on a normal workday morning and, checking your emails as you so often do first thing every morning, you notice an impromptu meeting with the boss has been scheduled for early this morning. After quickly getting ready for your day, you commute to the office (whether you drive in or log on from the home office). Popping into the boss’s meeting room, you notice HR is present. Uh-oh you think, as your stomach flips. That’s not usually a great sign.

Within the first couple of sentences, you hear the words “we have to let you go”.  Your blood rushes to your ears and anything said after that is lost. You’ve just been laid off. If you’re lucky, maybe there’s a couple of months of severance pay. Otherwise, that’s the last paycheck for a while.

“But we just upgraded the lease on our cars. What about the kids? Christmas? Health insurance? Ugh. Why haven’t we been saving more. How am I going to break this to my wife?”

This situation plays out all too often.

The rich don’t work for money. They make their money work for them. – Robert Kiyosak

Now let’s imagine an alternative scenario – one in which you’ve been leveraging your money…   

Over the last couple of years you’ve regularly put aside some of your paycheck, as well as taking a nice portion of those bonuses that have come in, and invested passively in real estate. Those investments have built up into an envious and steady income stream and you’ve even reinvested most of the returns and a couple of the larger cash distributions from refinancing events into additional real estate deals – compounding your gains. 

Ironically enough, of late you’ve actually been considering submitting your notice to the boss in order to spend more time with the family while the kids are still around and to work on that passion project that you’ve been dreaming of for what seems like ages now. This is just the nudge you’ve needed – a relief!  And you’ll even come out with some severance to fund the latest real estate deal you’ve been analyzing.  This day couldn’t get much better!  Time to call the wife and invite her to a celebratory lunch!

The three Types of Income

 

Active Income: is a wage from your employer and requires your activity in exchange for money.  When you stop, the income stops. Time for Money.

Residual Income: means you receive money after the work is done. For example, an author invests time upfront into a book and then receives residual income on the subsequent sales.

Passive Income: is earned with very little effort and continues flowing even when you aren’t working. Real estate investments are one of the most stable and high-returning sources of passive income.

Now remember the job loss scenario? In that scenario where you’ve built passive income on the side, although you lose your active salary, you still have income.

Social norms guide most people into active income jobs where they get stuck trading their time for money. Wealthy people implement a different approach.  They don’t trade their time for money.  They have learned to make their money work for them!

Financial freedom is achieved when your earned passive income allows you to live without relying on your active income.

INVESTING INSTOCKS VS. REAL ESTATE

Historically, the stock market returns about 8% annually, which means $100,000 would produce roughly $8,000 per year. That’s only $667 per month.

To replace an income of $3,000 per month, you’d need $36,000 per year, which would be 8% of $450,000.

However, with real estate, $100,000 could buy a $400,000 rental home. How? Through leverage.

Leverage means the bank brings $300,000 to the table.

You put in 25%, the bank puts in 75%, and you earn 100% of the profits.

A $400,000 home renting for $3,600 with a mortgage of $2,100 would net you $1,500 per month. Theoretically, 2 investments of this size could replace a $3,000 monthly income.

The total rental income plus $25,000 in additional equity (based on 5% annual appreciation) equals $43,000, or 43% return in just one year.

“BUT I DON’T WANT TO BE A LANDLORD!”

While the numbers for real estate sure look enticing, for many people being a landlord does not. As they say in the rental business – tenants, termites and toilets. No thank you!

This is where, instead, you can join a small team to acquire real estate and leave the property management to the professionals.

When investing $100,000 in real estate syndication, it’s quite common to earn $8,000 per year (8%), similar to the stock market. This 8% comes in the form of cash distributions, also known as ‘cash on cash returns’.

However, the powerful opportunity lies in the sale of the asset. Syndications usually hold property investments for about 5 years. During this time, building improvements are made, which directly drive up the overall value of the asset, and the general market value typically rises.

Upon the sale, it is common that you receive $160,000 (your initial investment of $100,000 plus $60,000 in profit). This, plus the passive income of $8,000 per year (totaling $40,000), equals $200,000, which is a 20% average annual return. Just putting a few of those investments together over time (or upfront) can generate a tremendous passive income cash flow stream.

SO THIS IS WHERE I SUGGEST YOU QUIT!!!

Quit:

  • Trading your precious time for a paycheck
  • Working on someone else’s plan
  • Paying so much in taxes
  • Missing out on your dreams, time with your family and adventures
  • Putting off your future!

Take action today and start building up your passive income road to freedom.

  • EXPLORE more about the power of passive real estate investments in our section of other blogs and videos.
  • SIGN UP for our newsletter for passive income related content delivered right to your inbox
  • JOIN our Passive Income Investor’s Group to gain access to multifamily investment opportunities and more behind the scenes content